April 16, 2021
5 minutes of reading
Comments expressed by Businessmen the contributors are their own.
While most investors keep an eye on either Nasdaq or Bitcoin, it is interesting to note that the best performing asset class since the beginning of the year (excluding cryptocurrencies) is goods. Brent crude oil is back above 60 USD / barrel, copper is at the highest level in 8 years and palladium has returned to 6 years ago.
After being shunned in the allocation of wealth for more than a decade, the idea of a graceful return on merchandise is starting to take hold in strategists. Indeed, JP Morgan has just published research under which commodities begin a new “super cycle”.
Last October, we argued that certain conditions were indeed available for a permanent change in the commodity cycle. How’s the situation today?
Brief history of the commodity super cycle
Again, this asset class tends to grow in relatively long cycles. In the 1990s, the emergence of ” Should be economical“supposedly marks the end of dependence on commodities. The S&P GSCI Commodity Index has experienced a spectacular bear market that began after the First Gulf War. But the bubble burst. technology in 2000 put an end to the bear cycle A super bullish The major financial crisis of 2008 marked a new trend reversal that led to long-term ineffective goods. By the end of 2020, commodities hit a new low compared to stocks.
Relative performance of the S&P GSCI compared to the S&P 500
The past decade is really characteristic of the “deflation boom”. Amid low or even negative interest rates and sluggish growth, investors rushed to invest in bonds and grow. share In developed countries, it hurts valuable stocks, emerging countries and commodities (except gold).
These asset allocation preferences have become even more pronounced since 2015-2016. When economic recovery should have accelerated, a series of events – Brexit, trade war and pandemic – effectively delayed the end of the deflation cycle. Fiscal austerity in developed countries and Federal ReserveWrong moves in 2018 inevitably play a key role in the real economy’s underperformance as excess liquidity causes less financial assets.
Towards a permanent trend reversal?
Let’s start with the signals emitted by the financial markets themselves, the so-called “internal indicators”. For example, copper, the metal often referred to by investors as “Dr. copper” for its ability to predict economic cycles, is up 70% from its March low.
Since November, the sectors’ performance has been cyclical Defense stocks Also noteworthy, the energy sector alone, has grown by more than 50% since the beginning of November.
Also noteworthy is the strong recovery in container freight rates. For example, the cost of shipping between Asia and Europe has tripled since November due to lower operating capacity issues.
Finally, there is a certain macroeconomic logic that could change the game in the coming years. Of course, the global economy is still very far away. Most developed countries are currently in the “K” recovery phase, where some parts of the economy are recovering strongly while other sectors are still in decline (eg tourism). But let’s remember that the situation is very different from 2008. The banks are in much better shape. On the other hand, we are still in a move that encompasses the combined effect of two factors essential for an economic recovery: fiscal leverage and monetary stimulus. In addition, there is a possibility of “white swan” appearance: consumption recovered strongly after the arrival of vaccines, improved business sentiment and world trade recovery potential. Ultimately, a weak US dollar and a strengthening Chinese yuan could have an exponential impact on activity in emerging countries.
Consequences of property allocation
A new commodity “super cycle” will inevitably have major consequences on the performance of different asset classes. It means switching from deflation mode to “steady” mode. Against this backdrop, the bond rally (eventually) will come to an end, which means that the days are more complicated for a 50% equity, 50% well-known bond portfolio. The property allocator should then turn to property guard against inflationary such as TIPS (inflation-linked bonds), cycle stocks and … commodities.
On the second issue, the Bloomberg Commodity Index appears to have broken its downtrend. Although gold has performed very well by 2020, it’s now the turn of the industrial metals to dominate performance. But it is likely that the energy sector may surprise investors the most. Although a synchronized recovery in global operations may be beneficial to demand, perhaps the supply situation is likely to facilitate the recovery of black gold. Indeed, the “Green New Deal” has resulted in the apparent depletion of oil infrastructure, to the point where demand is expected to exceed supply this year. Such conditions could even create the risk of an energy crisis, causing a dramatic rebound in goods.
Of course, this new super cycle still has many theories. The enormous amount of debt accumulated by governments and companies acts as a natural barrier to any violent increase in bond yields. Structural problems (demographics, for example) continue to weigh on the power of global growth. But as is often the case in history, inflation and cycle reversals often happen when the least anticipated.
Related: Are you facing a commodity trap?